Chapter 21-1 Prepared by Dan R Ward Suzanne P Ward University of Louisiana at Lafayette Chapter 21 Process Costing Chapter 21-2 Accounting Principles, Ninth Edition Study Study Objectives Objectives Chapter 21-3 Understand who uses process cost systems Explain the similarities and differences between job order and process cost systems Explain the flow of costs in a process cost system Make the journal entries to assign manufacturing costs in a process cost system Compute equivalent units Explain the four steps necessary to prepare a production cost report Prepare a production cost report Explain just-in-time (JIT) processing Explain activity-based costing (ABC) Preview Preview of of Chapter Chapter Process cost accounting focuses on massproduction of products that are identical or very similar in nature In contrast, job order cost accounting focuses on the individual job Chapter 21-4 Process Process Costing Costing Nature Natureof of Process ProcessCost Cost Systems Systems Uses Similarities and Differences Process Cost Flow Assignment of Manufacturing Costs Chapter 21-5 Equivalent EquivalentUnits Units WeightedAverage Method Refinements Production Cost Report Comprehensive Comprehensive Example Exampleof of Process ProcessCosting Costing Physical Units Equivalent Units of Production Unit Production Costs Cost Reconciliation Schedule Production Cost Report Costing Systems – Final Comment Contemporary Contemporary Developments Developments Just-in-Time Processing Activity-Based Costing Nature Nature of of Process Process Cost Cost Systems Systems Use to apply costs to similar products that are massed produced in a continuous fashion Examples include the production of Cereal, Paint, and Soft Drinks Illustration 21-1 Chapter 21-6 SO 1: Understand who uses process cost systems Comparison Comparison of of Products Products Produced Produced Under Under Process Process and and Job Job Order Order Cost Cost Systems Systems Illustration 21-2 Chapter 21-7 SO 1: Understand who uses process cost systems Nature Nature of of Process Process Cost Cost Systems Systems Review Question Which of the following items is not a characteristic of a process cost system: a Once production begins, it continues until the finished product emerges b The focus is on continually producing homogenous products c When the finished product emerges, all units have precisely the same amount of materials, labor, and overhead d The products produced are heterogeneous in nature Chapter 21-8 SO 1: Understand who uses process cost systems Job Job Order Order Cost Cost vs vs Process Process Cost Cost Systems Systems Job Order Cost Systems Chapter 21-9 Process Cost Systems Costs are assigned to each job Costs are tracked through a series of connected manufacturing processes or departments Products have unique characteristics Products are uniform or relatively homogeneous and produced in a large volume SO 2: Explain the similarities and differences between job order cost and process cost systems Job Job Order Order Cost Cost vs vs Process Process Cost Cost Systems Systems Illustration 21-3 Chapter 21-10 SO 2: Explain the similarities and differences between job order cost and process cost systems Production Production Cost Cost Report Report Mixing Mixing Department Department Illustration 21-23 Chapter 21-44 SO 7: Prepare a production cost report Production Production Cost Cost Report Report Mixing Mixing Department Department Review Question Largo Company has unit costs of $10 for materials and $30 for conversion costs If there are 2,500 units in ending work in process, 40% complete as to conversion costs and fully complete as to materials cost, the total cost assignable to the ending work in process inventory is: Chapter 21-45 a $45,000 $45,000 b $55,000 c $75,000 d $100,000 SO 6: Explain the four steps necessary to prepare a production cost report Contemporary Contemporary Developments Developments Just-in-Time (JIT) Processing A processing system that is dedicated to having the right products or parts as they are needed Objective: To eliminate all manufacturing inventories to make funds and space available for more productive purposes Elements of JIT: Dependable suppliers; Multi-skilled workforce; Total quality control system Benefits of JIT: Reduced inventory; Enhanced product quality; Reduced rework and storage costs; Savings from improved flow of goods Chapter 21-46 SO 8: Explain just-in-time (JIT) processing Contemporary Contemporary Developments Developments JIT JIT Illustration 21-24 Chapter 21-47 SO8: Explain just-in-time (JIT) processing Contemporary Contemporary Developments Developments Activity-Based Costing (ABC) An overhead cost allocation system that focuses on activities performed in producing a product Traditional Costing System: allocates overhead to products using predetermined unit-based output rate ABC System: allocates overhead to multiple activity cost pools and assigns cost pools to products using cost drivers that represent activities used Assumptions of ABC: All overhead costs for an activity must have the same cost driver and should respond proportionally to changes in the activity of the cost driver Chapter 21-48 SO 9: Explain activity-based costing (ABC) Contemporary Contemporary Developments Developments Activity-Based Costing (ABC) continued May be used with either a job order or a process costing system Primary Benefit: More accurate and meaningful product costing Secondary Benefit: Improved cost data regarding an activity may lead to reduced costs for that activity ABC makes managers realize that activities not products ultimately determine company profitability Chapter 21-49 SO 9: Explain activity-based costing (ABC) Traditional Traditional Costing Costing versus versus Activity-Based Activity-Based Costing Costing Production and Cost Data APPENDIX Illustration: Assume that Atlas Company produces two products, The Boot and The Club The Boot is a high-volume item totaling 25,000 units annually The Club is a low-volume item totaling only 5,000 units per year Each product requires one hour of direct labor for completion Therefore, Total annual direct labor hours are 30,000 (25,000 x 5,000) Expected annual manufacturing overhead costs are $900,000 Predetermined overhead rate is $30 ($900,000 / 30,000) per direct labor hour Direct materials cost per unit is $40 for The Boot and $30 for The Club Chapter 21-50 Direct labor SO10 cost isApply $12 activity-based per unit for costing each product to specific company data Traditional Traditional Costing Costing versus versus Activity-Based Activity-Based Costing Costing Unit Costs Under Traditional Costing Illustration 21A-1 Units costs—traditional costing Chapter 21-51 SO10 Apply activity-based costing to specific company data Traditional Traditional Costing Costing versus versus Activity-Based Activity-Based Costing Costing Unit Costs Under ABC DETERMINING OVERHEAD RATES UNDER ABC Atlas Company’s expected annual overhead costs of $900,000 relate to three Illustration 21A-2 Computing overhead rates-ABC Chapter 21-52 SO10 Apply activity-based costing to specific company data Traditional Traditional Costing Costing versus versus Activity-Based Activity-Based Costing Costing Unit Costs Under ABC ASSIGNING OVERHEAD COSTS TO PRODUCTS UNDER ABC In assigning costs, it is necessary to know the expected number of cost drivers for each product Illustration 21A-3 Expected number of cost drivers Chapter 21-53 SO10 Apply activity-based costing to specific company data Traditional Traditional Costing Costing versus versus Activity-Based Activity-Based Costing Costing Illustration 21A-2 Illustration 21A-3 Illustration 21A-4 Assignment of overhead cost to products Chapter 21-54 $100,000 300,000 25,000 $425,000 $200,000 200,000 75,000 $475,000 25,000 5,000 $17 $95 SO10 Apply activity-based costing to specific company data Traditional Traditional Costing Costing versus versus Activity-Based Activity-Based Costing Costing Comparing Unit Costs The comparison shows that unit costs under traditional costing have been significantly distorted Illustration 21A-5 Chapter 21-55 SO10 Apply activity-based costing to specific company data Traditional Traditional Costing Costing versus versus Activity-Based Activity-Based Costing Costing Comparing Unit Costs ABC involves the following steps Identify the major activities that pertain to the manufacture of specific products Accumulate manufacturing overhead costs by activities Identify the cost driver(s) that accurately measure(s) each activity’s contribution to the finished product Assign manufacturing overhead costs for each activity to products, using the cost driver(s) Chapter 21-56 SO10 Apply activity-based costing to specific company data Traditional Traditional Costing Costing versus versus Activity-Based Activity-Based Costing Costing Benefits and Limitations of Activity-Based Costing Benefits Enhanced control over overhead costs Better management decisions Limitations Chapter 21-57 Expense of obtaining the cost data ABC does not eliminate arbitrary assignments SO10 Apply activity-based costing to specific company data Copyright Copyright Copyright © 2009 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein Chapter 21-58 .. .Chapter 21 Process Costing Chapter 21- 2 Accounting Principles, Ninth Edition Study Study Objectives Objectives Chapter 21- 3 Understand who uses process cost... departments Chapter 21- 16 SO 3: Explain the flow of costs in a process cost system Process Process Cost Cost Flows Flows Illustrated Illustrated Example – Tyler Company Illustration 21- 5 Chapter 21- 17... in nature Chapter 21- 8 SO 1: Understand who uses process cost systems Job Job Order Order Cost Cost vs vs Process Process Cost Cost Systems Systems Job Order Cost Systems Chapter 21- 9 Process